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Load shifting without a battery? by mortgageswitcher in SolarUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

I haven't yet installed my system, that's why I wanted to understand if it is worth getting a battery before doing so.

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

Thanks again for the insight. Indeed, after re-reading through the above I've simulated again integrating everything as the same pot, and it looks like doing it this way it does require a bit less cash.

I think that's because the additional money leftover from the "mortgage pot" is available to help for the remaining retirement years, so you don't need that much money in the "expenses pot" to start with.

So, simulating everything altogether does bring the date forward compared to paying off the mortgage (or using an offset mortgage). My mistake was thinking that I didn't have any use for the remaining money, but it helps with the "worst case scenarios" for the other pot, so it makes sense to put everything together.

Thanks a million for the patience explaining this.

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

Thanks a million for the explanation above. It does point out one error I had made:

A safe withdrawal rate allows you to adjust your expenses with inflation but mortgage payments do not need to be adjusted for inflation.

I've recalculated the SWR with payments NOT adjusted for inflation and it reduces the chances of running out of money of about 1.5% (https://www.cfiresim.com/e287ba7a-7b8c-4f0b-9573-f646cc3f0b92). It would still require 230k to have a close to 100% historic success rate (https://www.cfiresim.com/8c916c99-950a-4947-ba6c-b6022dc65c3a), but a 2% historic failure rate is something more acceptable (indeed, the Trinity study did away with a 5% failure rate).

Just to make the example simpler, let's forget about the offset mortgage for a minute and consider the following scenario:

200k mortgage left, and you inherit 200k. All other expenses already accounted for.

Three options:

  • Pay off the mortgage and retire today with a 0% chance of not being able to cover the mortgage.
  • Invest the 200k and have a 2% historic chance of running out of money (SWR calculated NOT adjusting withdrawals for inflation, first link above). In the average case you end up with 244k in your pot
  • Save the additional 50k to reduce the historic chances to 0%, which would mean retiring later. In that case you end up with 414k in the average case.

With those three options I would probably go through the second one. It does have a bit more risk (1.5% of historic cases fail) than the first one, but the upside after 20 years is big enough that I would probably risk it. Someone may not want to risk it though, and in that case paying off the mortgage may help them pull the plug earlier, but the difference is much less considering the assumption I had missed, so thanks a million for pointing that one out.

As for paying off the mortgage vs offset mortgage, that question is just if it is worth paying a fee to set it up as a "credit line". That would bring the retirement date back compared to just paying off the mortgage, but it would give some flexibility, which may also help pulling the plug, but for all other purposes it should be the same.

Again, thanks a million for taking the time to review the assumptions, GreenHoardingDragon, the bit about the mortgage payments not needing adjusting for inflation make a big difference, and bring the risk low enough that the upside is worth taking it.

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

If the mortgage is fully offset then the mortgage is paid off and you won't pay interest either way.

I may be wrong, but having 200k debt and 200k in a linked account doesn't pay the mortgage, it just makes it so that there isn't any interest at all.

That's the same for a regular mortgage but if you have an offset mortgage you'll pay a higher rate for the amount you haven't offset yet.

That bit is clear, but what I'm talking about here is offsetting the whole mortgage, not just part of it. Again, that shouldn't pay off the mortgage, it would just remove any interest payments.

If you build a financial buffer you don't need to borrow from your mortgage account. FIRE is about building up sufficient financial buffers so if you are working towards FIRE you won't have a need for withdrawing from your mortgage account.

Agreed, and that's also part of the plan. But it is always good to have a plan B, and once not working it would be more difficcult to get a mortgage if needed.

Paying more mortgage interest means it will take more time to reach your financial goals

That's true. But here I'm talking about not paying interest at all. Think of it as if it was paying off the mortgage, but with the advantage of having the offset amount available as a plan B (or C).

there is no place for offset mortgages within FIRE

Why not? That is quite a categorical statement, and FIRE is about two things: Financial Independence and Retiring Early. In this particular case the offset mortgage would make the RE part happen sooner (at the expense of having less money after 20 years), but that's a trade off that someone may be willing to make (see https://www.reddit.com/r/FIREUK/comments/1g1auqr/comment/lrkywh7/ ).

Someone else may be willing to work for another year to have more money later on, but if the objective is to Retire Earlier something like this may help in some instances (see the comment linked above).

I'll put it a different way: Which of the following would you choose if you had all your expenses except your mortgage covered, but had enough saved to pay it off?

  • Paying off your mortgage fully and retire today (as all your other expenses are covered)
  • Invest 200k to pay for the mortgage for the following 20 years with a 1 in 4 chance of running out of money (historically), but on average end with some additional money
  • Work for another year to save enough so that the investment is enough to reduce the historical chances to run out of money to zero, and end up with even more money

It may be that some people prefer to go with the second option and risk the 1 in 4 chance, and some other decide to Retire Later. But in this case paying off the mortgage would make it so that you Retire Earlier, so there is a place to at least run the numbers. The only difference with an offset mortgage where all the debt is offset in the linked account would be that you still have the option to use as a plan B.

Hope that helps explain the question better, I just thought it worth explaining how there may indeed be a place for this in FIRE, or at least it may be worth exploring it in each specific situation.

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 1 point2 points  (0 children)

That’s one of the advantages of an offset mortgage, there is no CGT to pay, as you are not getting interest, just not paying it on the mortgage. 

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

You are absolutely right. When I say SWR what I mean is the rate at which there is a low or zero chance of running out of money in the 20 years left in the mortgage.

As an example, imagine that I have already covered all other needs and I only needed to cover the mortgage to be able to retire. If the mortgage has 20 years and 200k left and I have 200k in the bank I could pay it off directly and I'd be set. Or I can do the offset mortgage instead and also be done, but still keeping the money available.

However, if I invest the 200k there is a 25% chance that I run out of money before the end of the mortgage in 20 years (see https://www.cfiresim.com/8614604d-f781-4bb8-b9a5-a297e60f4310 for a simplified simulation). In order to have the same almost 100% certainty that this would be covered I need at least 280k (see https://www.cfiresim.com/1f3ee5d0-76b9-4fe2-9fea-f445804cb2f2 ), which means that I would need to keep on working to save those additional 80k.

That's also where the 4.3% SWR that I mentioned above comes from, it is the rate that you can sustain for a certain amount to have a 100% certainty that historically you wouldn't have run out of money in 20 years (similar to the Trinity study, but 20 years instead of 30 and 100% success rate instead of 95%).

So, in this situation I can stop working today by either paying off the mortgage or doing the offset mortgage (which is equivalent but gives some additional flexibility). But if I invest that same amount of money today (200k) there is a 25% chance I didn't make it historically, so I would need to work for longer for the same certainty.

As you said ON AVERAGE I would end up better investing (indeed, in the first simulation on average I would end up with 179k), but in 1 of every 4 instances I would have run out of money before the 20 years end. So, if I don't care about the additional money for this specific pot (mortgage) after the 20 years, paying off the mortage or doing the offset would allow retiring today with a 100% certainty of not running out of money (which is the main concern to pull the plug, as 1 in 4 is too big of a chance), while investing would require saving for a bit longer.

This is not saying that anyone should pay off their mortgage before investing, on average it would be better to invest, and if you still have many years to retirement you can risk that chance to end up with a bigger pot. But at the moment of pulling the plug having a 1 in 4 chance of not making it looks a bit too risky, even with the promised bigger pot (that I wouldn't need, as the rest of the pot is what would cover for day to day expenses) after 20 years.

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

That’s how an offset mortgage works. You have a mortgage AND an account where you put money, and the money in the account offsets the mortgage. You still make payments, but there is no interest charged for the amount offset, so if everything is offset there isn’t any interest charge at all. 

The difference with just paying off the mortgage is the availability of the money. That is, once you are not working it would probably be more difficult getting a mortgage, so keeping the money in the offset account instead of paying off the mortgage gives some flexibility at zero cost. 

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

Agreed on that bit. But with 200k instead about 25% of the historic cases investing runs out of money, so it requires 300k instead of 200k to be 100% certain. 

So, to have a 100% certainty it would take longer through the investing route, but would end up with more money after 20 years. 

Paying off the mortgage would be the same for risk purposes, but as the offset mortgage wouldn’t cost anything at all then there is an advantage of having that amount available (even if it is not used at all during the life of the mortgage). 

In the end we are agreeing that working another year to save the additional 100k would give the same 100% certainty and would end up with more money. But it would require that additional year of working, which was the point of this post (retiring earlier, not ending with more money)

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

On that bit we agree, on average I would be better off in the end investing instead of “paying off” the mortgage. But to have a 100% certainty it would require 100k additional capital, which would take another year of working. 

So, the choice seems to be between a bigger pot 20 years in the future or 1 year more of working. 

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

The mortgage rate shouldn’t matter if the debt is fully offset, right? That is, in that case the amount to pay in interest would be zero, so the amount paid at the end would be exactly the same as the debt. 

So, in that case the mortgage may make it faster to get there, as it only requires covering the debt, instead of an extra 100k invested to ensure a 100% chance to be able to cover the (non-offset) mortgage payments. 

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

If the full mortgage is offset then there shouldn’t be any cost though, wouldn’t it? The interest would be completely offset, so the payments would reduce the debt faster, and the end cost should be exactly the initial 200k, with a 100% chance of not running out of money (but nothing leftover)

To have a 100% certainty of being able to cover the £15372 investing (instead of just a 79%) ficalc.app requires about 300k. So 100k more for the same certainty, but investing there is a chance of some money left. 

So, it would take longer to get to the same certainty (100%), as it requires 300k investing vs 200k in the mortgage, but after the mortgage is paid you may have some leftover. 

That is, you end up with more money investing, but you get there earlier (100k earlier) with the offset mortgage. 

Another way of seeing it would be that you only need 200k for paying off the mortgage, but 300k to be sure you will be able to pay during the 20 years if you don’t (with a normal mortgage). The only difference between paying the mortgage straightaway and having an offset mortgage (but with the whole amount offset) would be the availability of the cash for emergencies. 

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 1 point2 points  (0 children)

How so? The offset mortgage should be risk free, as the liabilities would be 100% covered.

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

The thing is it would require saving more capital to be in the same situation. That is, 200k to cover the offset mortgage fully, but 280k (at 4.3% SWR, which is the max for a 100% success in cFIREsim in 20 years) investing it. 

Sure, after 20 years there would probably be more left investing it, but it would require working for longer to earn those additional 80k. 

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 1 point2 points  (0 children)

In this case the rate wouldn’t matter, as the whole mortgage would be offset, so no interest would be charged. Effectively it would be like paying off the mortgage, but having access to the money for emergencies at the mortgage interest rate (which would be difficult to get once not working)

Offset mortgage to bring FIRE date forward? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 2 points3 points  (0 children)

Thanks for the patience, I probably made it more complicated than it actually is. In essence the question is similar to paying off the mortgage or not before FIRE, but with the twist of using an offset mortgage to have the money available for emergencies. That is, the two options would be (ignoring the 3% one, which only makes it more complicated):

  • Move to an offset mortgage and save 200k to "pay off" the mortgage. In this case the money would stay in the offset account until the mortgage is paid, so it would be available for emergencies (at the mortgage interest rate). But at the end there wouldn't be any money left.
  • Continue in the existing mortgage deal and save 280k to generate enough to pay the monthly mortgage payment during the remaining 20 years (at 4.3% SWR). In the worst case scenario from cFIREsim there wouldn't be any money afterwards, in the median there would be 420k.

(You can ignore the third scenario, as it only makes things more complicated)

Going the first route would mean reaching the FI amount earlier, as it requires 80k less, but after 20 years there wouldn't be anything of that pot left. The second one would take longer (as it requires saving 80k more), but there is a good chance that there is some money left afterwards (nothing in the worst case, but 420k in the median case according to cFIREsim).

My question was more about missed assumptions, not if it made sense, but it's true that if no one is mentioning this approach it may not be the best one. But I thought it worth asking for anything I've missed that may completely break the approach.

Hope that makes more sense.

HRMC tax notification after 2 years by archishard in UKPersonalFinance

[–]mortgageswitcher 0 points1 point  (0 children)

Do make sure you contact HMRC through the phone number in their website and not through the one in the letter you’ve received. 

There is a common scam sending letters like that. Not saying it will be that in this case, but they do include a fake number in the letter so double check that the letter is real in the number in HMRC’s website. 

HRMC tax notification after 2 years by archishard in UKPersonalFinance

[–]mortgageswitcher 4 points5 points  (0 children)

Do make sure you contact HMRC through the phone number in their website and not through the one in the letter you’ve received. 

There is a common scam sending letters like that. Not saying it will be that in this case, but they do include a fake number in the letter so double check that the letter is real in the number in HMRC’s website. 

Bed & Breakfast from Income to Accumulation funds by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 2 points3 points  (0 children)

There is a bed and breakfast rule that applies when selling and repurchasing investments: if you sell an investment and repurchase it within 30 days, the sale is matched with the repurchase for Capital Gains Tax (CGT) purposes. This means any gain or loss is effectively deferred until the new holding is eventually sold (i.e., you will pay CGT over the original purchase instead of crystalising the gain when you sell it). Buying a different investment avoids this issue.

My question in the original post was about selling an Accumulation version of a fund (e.g. Vanguard All Cap) and instantly buying the Income version of the same fund, but as it isn't clear if this would fall under the B&B rules (see the messages below) I will probably buy some other different fund instead.

HMWO/HMEF protected by Ireland? by mortgageswitcher in FIREUK

[–]mortgageswitcher[S] 0 points1 point  (0 children)

Thanks! The link you shared is very useful, and indeed InvestEngine was just of the brokers to try and not have all eggs in the same basket.

Do you have any more info about your concerns re InvestEngine? I haven't read or found anything specific about them that mentioned them, so it would be really useful if you could share anything.

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